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Tuesday, March 31, 2009

We have been exploring the inflation vs. deflation debate on our show for several months and while we have heard compelling arguments on both sides---we believe that we are headed for a period of massive inflation. Will most be surprised? Yes. Most of you know that at Stock Shotz, we take a common sense approach to the markets. So as we explored this debate we did a little unsophisticated research to assist with our analysis. We started by heading down to the local grocery store to see if the price of a gallon of milk, which was marked up almost daily as the price of oil increased last summer, had gone down in the same proportion as had a barrel of oil. Answer--NO.What? No, but what about the argument that we are in a period of deflation? Isn't the demand for milk so sparse that they are dropping the price with each gallon? Not hardly.

This recession/depression has been one of "pockets". While many have lost their jobs, homes and more---there are segments of the population that have not had to make many adjustments in their purchasing habits. Many have argued on our show that all of the money being pumped into the system could not cause inflation because it was simply rebuilding the balance sheets of the banks--which had been decimated. But is that totally the case? I would argue no!!! Economist John Williams of Shadowstats.com argued this time last year (as oil prices were rising and many were talking inflation) that we had not seen the true effects of monetary inflation. He contended that we were seeing inflation caused by energy prices and not the first government stimulus or the dovish Federal Reserve Policy. I agree with Williams that the true effects of the increase in money supply have not surfaced yet. Lets look at this recession/depression a little deeper. This period has seen fear strike consumers like none other in my lifetime. Simply put, everybody is scared as they have seen their 401K's cut in half or more. People feel less wealthy. All of this action has the money multiplier at HISTORIC LOWS.

How can tax and spend, borrow and spend be anything but inflationary? What we are seeing now is not the rebuilding of the banks balance sheets, it is only a timing headfake. Inflation is just around the corner. The money that has been pumped into and is being pumped into the economy is STILL THERE. We are not seeing the massive inflationary effects because the money multiplier is so low---it has been below 1 and is now hovering right around the 1 level. These spending programs will cause the multiplier to rise and when it does--look out. Sadly enough--the inevitability of the increase in the money multiplier is not the only risk factor that we have for inflation. Most every economist will agree that Fed Funds rates of zero combined with MASSIVE GOVERNMENT BORROWING cannot result in anything but a weaker dollar over time. Yes, during this downturn, the dollar held its position as the world's reserve currency. It performed surprisingly well, but the ingredients are in the mix for a weaker dollar in the future. What happens when the dollar starts to decline? Oil will rise quickly. Throw in the fact that OPEC has been cutting production for quite sometime and there has been worldwide stimulus designed to get consumers spending again and we have a triple threat on the oil front--the weak dollar, production cuts, and demand that will most certainly increase.

Yes a GM bankruptcy will most likely press the pause button on the money multiplier increase, but it will not get anywhere near the stop button. When the fire of inflation is lit, it will be virtually impossible to extinguish. Does anyone believe that it will be politically popular to push for contractionary policy anytime soon on the heels of the worst recession that most of us have ever seen? No way, and if we don't get on top of inflation it will spiral out of control.

We have been exploring the inflation vs. deflation debate on our show for several months and while we have heard compelling arguments on both sides---we believe that we are headed for a period of massive inflation. Will most be surprised? Yes. Most of you know that at Stock Shotz, we take a common sense approach to the markets. So as we explored this debate we did a little unsophisticated research to assist with our analysis. We started by heading down to the local grocery store to see if the price of a gallon of milk, which was marked up almost daily as the price of oil increased last summer, had gone down in the same proportion as had a barrel of oil. Answer--NO.What? No, but what about the argument that we are in a period of deflation? Isn't the demand for milk so sparse that they are dropping the price with each gallon? Not hardly.

This recession/depression has been one of "pockets". While many have lost their jobs, homes and more---there are segments of the population that have not had to make many adjustments in their purchasing habits. Many have argued on our show that all of the money being pumped into the system could not cause inflation because it was simply rebuilding the balance sheets of the banks--which had been decimated. But is that totally the case? I would argue no!!! Economist John Williams of Shadowstats.com argued this time last year (as oil prices were rising and many were talking inflation) that we had not seen the true effects of monetary inflation. He contended that we were seeing inflation caused by energy prices and not the first government stimulus or the dovish Federal Reserve Policy. I agree with Williams that the true effects of the increase in money supply have not surfaced yet. Lets look at this recession/depression a little deeper. This period has seen fear strike consumers like none other in my lifetime. Simply put, everybody is scared as they have seen their 401K's cut in half or more. People feel less wealthy. All of this action has the money multiplier at HISTORIC LOWS.

How can tax and spend, borrow and spend be anything but inflationary? What we are seeing now is not the rebuilding of the banks balance sheets, it is only a timing headfake. Inflation is just around the corner. The money that has been pumped into and is being pumped into the economy is STILL THERE. We are not seeing the massive inflationary effects because the money multiplier is so low---it has been below 1 and is now hovering right around the 1 level. These spending programs will cause the multiplier to rise and when it does--look out. Sadly enough--the inevitability of the increase in the money multiplier is not the only risk factor that we have for inflation. Most every economist will agree that Fed Funds rates of zero combined with MASSIVE GOVERNMENT BORROWING cannot result in anything but a weaker dollar over time. Yes, during this downturn, the dollar held its position as the world's reserve currency. It performed surprisingly well, but the ingredients are in the mix for a weaker dollar in the future. What happens when the dollar starts to decline? Oil will rise quickly. Throw in the fact that OPEC has been cutting production for quite sometime and there has been worldwide stimulus designed to get consumers spending again and we have a triple threat on the oil front--the weak dollar, production cuts, and demand that will most certainly increase.

Yes a GM bankruptcy will most likely press the pause button on the money multiplier increase, but it will not get anywhere near the stop button. When the fire of inflation is lit, it will be virtually impossible to extinguish. Does anyone believe that it will be politically popular to push for contractionary policy anytime soon on the heels of the worst recession that most of us have ever seen? No way, and if we don't get on top of inflation it will spiral out of control.